LightPath Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended December 31, 2018 (the second quarter and first half of fiscal 2019). LightPath manufactures optical components and assemblies, including precision molded optics (PMO), infrared products and specialty products. Financial statements are unaudited.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2018 | Six months ended Dec. 31, 2018 |
|---|---|---|
| Revenue | $8.55 million, up 2% year over year | $17.10 million, up 7% |
| Gross margin | $3.54 million; 41% of revenue | $6.58 million; 39% of revenue |
| Operating income (loss) | $195,000 | $(84,000) |
| Net income (loss) | $16,000; $0.00 per share | $(567,000); $(0.02) per share |
| Adjusted EBITDA (non-GAAP) | $968,000 | $1.21 million |
- First-half operating cash flow was $(398,000), versus $1.62 million provided in the prior-year period. Investing cash flow was $(1.07) million, including $1.18 million of equipment purchases; financing cash flow was $(872,000).
- Cash and cash equivalents were $3.64 million at December 31, with an additional $1.00 million restricted under the loan agreement. Working capital was approximately $12.8 million.
- Loans payable had a reported carrying amount of approximately $5.86 million, including unamortized debt costs; capital lease obligations were $1.10 million. The Term II Loan’s interest rate was 7.50%. No revolving-line borrowings were outstanding.
- Total liabilities were $11.16 million and total assets were $46.40 million at December 31, 2018.
Material changes versus prior comparable periods
- Second-quarter revenue growth reflected PMO sales up 24%, partly offset by infrared sales down 12% and specialty sales down 14%. The infrared decline related primarily to timing of a large annual contract renewal; the company said shipments against the renewed contract were expected to begin in fiscal Q3.
- First-half revenue rose 7%, led by PMO and infrared growth; specialty revenue fell 25%, partly because a large prior-year development project did not recur.
- First-half gross margin declined from 43% to 39%. Management attributed pressure to product mix, volatile germanium input costs, relocation-related labor and overhead, and manufacturing inefficiencies.
- First-half net results shifted from $641,000 income to a $567,000 loss. Management cited lower gross margin, relocation costs, higher product-development spending, and an unfavorable foreign-exchange swing. Lower interest expense and the absence of prior-year warrant remeasurement expense partly offset these factors.
- First-half foreign-currency transaction losses were approximately $388,000, compared with gains of approximately $409,000 a year earlier.
- Cash, cash equivalents and restricted cash declined to $4.64 million from $6.51 million at June 30, 2018. The company also reported a 12-month backlog of $18.1 million, up 41% from June 30.
Outlook, commentary and risks
- Management anticipated revenue growth for the remainder of fiscal 2019, primarily from infrared products, citing backlog, quote activity and the renewed annual contract. It expected capital expenditures in fiscal 2019 to be lower than in fiscal 2018.
- Management expected relocation-related costs to remain elevated during the rest of fiscal 2019, with operating performance and costs expected to improve as the Irvington facility consolidation progresses. The move was expected to be substantially complete by June 30, 2019. Estimated additional relocation expenses were $474,000, with a remaining lease obligation of up to $433,000 after vacating.
- The company stated it believed resources were adequate for current operations over the coming year, but warned that weaker sales, higher material or labor costs, or unrealized efficiency improvements could require additional capital. If capital were unavailable on reasonable terms, it might consider strategic alternatives, including asset or company sales, joint ventures or licensing.
- A lender had waived a prior fixed-charge-coverage covenant default. The company reported covenant compliance at December 31, 2018, but $1 million of domestic cash remained restricted pending two consecutive compliant quarters and no continuing default. The revolving-line maturity was extended to March 21, 2019.
- Approximately 54% of cash and restricted cash was held by foreign subsidiaries. Chinese cash is subject to repatriation restrictions; the filing said retained earnings were approximately $2.4 million against an $11.3 million threshold.
- LightPath introduced BD6 infrared material as a lower-cost alternative to germanium and expected conversion to support margins over time; realization of this benefit is uncertain. The company referred investors to risk factors in its fiscal 2018 Form 10-K.
Important facts for investors to verify
- Whether the renewed infrared contract converts into shipments and revenue as expected, and how backlog translates into sales.
- Progress, total costs and operational effects of the Irvington facility relocation, including the estimated remaining expense and lease obligation.
- Gross-margin recovery, manufacturing efficiency and whether BD6 adoption reduces exposure to germanium pricing.
- Cash generation, access to capital, covenant compliance and release conditions for the $1 million restricted cash balance.
- Foreign-exchange exposure and the availability of foreign-held cash, particularly the restrictions on repatriating funds from China.